Court: Gas co. expenses can cut into royalties

Thursday

Mar 25, 2010 at 12:01 AMMar 25, 2010 at 11:13 PM

From the Associated Press- with Wayne Independent staff input

Pennsylvania's high court sided Wednesday with the natural gas industry in a dispute with landowners who had sought to invalidate the leases they signed before the Marcellus Shale rush intensified and drove up land values.

Marc Levy

Pennsylvania's high court sided Wednesday with the natural gas industry in a dispute with landowners who had sought to invalidate the leases they signed before the Marcellus Shale rush intensified and drove up land values.
In a 6-0 decision, the Supreme Court upheld a Susquehanna County judge's ruling that validated lease agreements that subtract drilling costs from the calculation of landowners' natural gas royalties.
"Certainly we're very pleased," said Pittsburgh lawyer Kevin C. Abbott, who had filed friend-of-the-court briefs in the case on behalf of Chesapeake Energy Corp. and other gas companies. "It does certainly look like a victory for the oil and gas industry."
The decision is expected to settle dozens of other cases pending in Pennsylvania's state and federal courts.
Minimum 1/8th royalty
In this case, landowner Herbert Kilmer and others had sued ElexCo Land Services Inc. and Southwestern Energy Production Co., contending that such leases were invalid because state law guarantees landowners a minimum one-eighth (12.5%) royalty from the production of oil and gas on their land.
Marian Schweighofer, who is president of the Northern Wayne Property Owners Alliance (NWPOA), said that the court decision did not impact the Alliance members. She said that they had been fortunate to negotiate a lease with Hess Corporation, that preserves the 12.5% royalty without deducting expenses the gas company incur. They also have lease protection against any adverse taxes.
She said that there are “many” Wayne County property owners affected because they signed leases early, and expenses will be subtracted from the 12.5% they were expecting to receive. Expenses include costs of transporting, treating and processing the gas, and loss due to shrinking of gas volume in the pipeline. The Pa. Supreme Court decision, she added, rules that these deductions are legal.
The NWPOA represents approximately 1,500 families and 70,000 acres of land in Wayne and Susquehanna Counties.
Schweighofer said that that the only recourse for them is through legislative action. She remarked that if she was one of the unlucky lease holders, she’s want a meter put on the well head to see just how much gas is being extracted.
Justice Max Baer, who wrote the court's decision, noted that the term "royalty" and the method of calculating a one-eighth share is not defined by the state's Guaranteed Minimum Royalty Act. However, he cited various texts on the industry that say a royalty is paid from the net amount remaining after deduction of certain production and well development costs.
Kilmer's lawyer, Laurence M. Kelly, said Wednesday evening that he was unaware of the decision and did not want to comment until he had read it.
Sour grapes
Industry representatives have suggested the lawsuits were sour grapes on the landowners' part because they had signed leases at values well below what their neighbors were negotiating months or years later from companies pursuing the Marcellus Shale.
The case was being closely watched by the company executives, who worried that a decision against their companies could invalidate tens of thousands of leases and throw the industry into chaos.
In addition, the royalty issue was being raised in more than 70 lawsuits filed in Pennsylvania's federal and state courts by plaintiffs seeking a judgment that the leases they signed were never valid.
Judicial decisions in two of the cases raised the prospect of a myriad of different legal opinions.
In Susquehanna County, the judge in the Kilmer vs. ElexCo case had handed the companies an initial victory, saying the law does not specifically prohibit the subtraction of costs.
Separately, a federal judge in Scranton hearing a case against Cabot Oil & Gas Corp. denied a motion to dismiss the case, saying the law's silence did not necessarily mean the costs can be legally deducted.
Kilmer appealed to state Superior Court, but industry lawyers asked the Supreme Court to step in and effectively settle the matter for everyone.
It did, and heard arguments in September.
On the Web
Read the Pa. Supreme Court opinion:
www.courts.state.pa.us/OpPosting/Supreme/out/J-78-2009mo.pdf

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